Question

Calculate the annualized rate of return on a 200-day commercial paper. This loan does not pay periodic interest; it is a discount security. The face value of the paper is $1 million and the current market value is $980,000.

Answer 1

This is how to solve this question.

Initial amount = $1 milion
Current Amount = $ 980,000

Number of years = 200 / 365 = 0.55 years

First, divide the current amount by the initial amount
x =$ 980,000 / $1,000,000
x = $ 0.98

Then, take x raised to the power of (1 / number of years)
y = x ^ (1/0.55)
y = 0.9639

Then, subtract it by 1

z = y - 1
z = 0.9639 - 1
z = -0.036

So, the annual rate of return is -3.60%